Choosing the Right Legal Structure for Your Startup: Which one is right for you?

Author: Velsa

Selecting the right legal structure is one of the first and most important decisions when founding a startup. It determines not only your liability and tax obligations but also how attractive your company is to investors. While some legal structures are sufficient for small projects, others are essential if you plan to scale and raise capital.

 

Which Legal Structures Are Relevant for Startups?

For most growth-oriented start-ups with VC potential, two legal forms make the most sense:

1. GmbH (Gesellschaft mit beschränkter Haftung – Limited Liability Company)

The GmbH is the preferred choice for startups looking to attract investors and raise larger funding rounds.

Advantages:

• Limited liability, protecting personal assets
• High credibility and acceptance among investors
• Flexible shareholder structures and share transfers

Disadvantages:

• • Minimum capital requirement of €25,000 (at least €12,500 must be paid in immediately)
  • Higher incorporation costs and stricter formal requirements compared to a UG

2. UG (Unternehmergesellschaft – Mini-GmbH)

The UG is a simplified version of the GmbH and is ideal for founders with limited initial capital who still want liability protection.

Advantages:

• Can be founded with as little as €1 in share capital
• Offers the same liability protection as a GmbH
• Can later be converted into a GmbH

Disadvantages:

• Required profit retention until €25,000 is accumulated for GmbH conversion
• Perceived as less reputable than a GmbH, especially among investors
  

 

Starting with a Founder-Holding – When Does It Make Sense?

In addition to the direct establishment of a GmbH or UG, a founder holding can be a strategic option.

Advantages:

• Tax deferral on exits: If the startup is sold, profits within the holding are taxed at just 1.6% instead of 28.5% if held directly by the founder.
• Flexibility for reinvestment: Exit profits can be retained within the holding and reinvested in future ventures.

Disadvantages:

• Additional administrative costs: Annual financial statements, tax advisory fees, and IHK contributions typically range from €800 – €2,000 per year.
• Not always worthwhile: If the exit proceeds are to be distributed directly to you via the holding company anyway, the tax advantage would no longer apply.

Most Founder-Holdings are incorporated as UGs.

 

When Are Other Legal Structures Useful?

While GmbH and UG are the best options for most startups, there are situations where other legal structures may be more suitable:

• GbR (Gesellschaft bürgerlichen Rechts – Civil Law Partnership): A simple structure for two or more founders with minimal bureaucracy. However, there is no liability protection, meaning founders are personally liable.
• Sole Proprietorship: Quick and easy for solo founders but also involves personal liability.
• AG (Aktiengesellschaft – Public Limited Company): More relevant for larger startups with IPO ambitions or international investors.

 

Key Questions to Consider When Choosing a Legal Structure

Your decision should be based on the following four questions:

1 How important is liability protection to you?
If you want to minimize financial risk, a UG or GmbH is the right choice.

2 Do you plan to raise investment?
Venture capital firms almost always prefer a GmbH.

3 How much initial capital do you have?
If you can provide €25,000, a GmbH is more advantageous in the long run than a UG.

4 Are there tax reasons for/against a particular legal form?

As corporations, GmbHs and UGs are generally taxed differently than a GbR or a sole proprietorship. In practice, the choice of legal form is therefore often driven by tax considerations

 

Conclusion: The Right Legal Structure Depends on Your Growth Strategy

If you want to build a growth-oriented startup, there is hardly any way around a GmbH or UG. The choice not only influences how you are liable, but also how attractive you are to investors. A founder holding can be a useful addition if you want to take advantage of tax benefits and reinvest profits in the long term.

If you are unsure or need a professional review of your founding documents, there are experts who can support you - from drafting contracts to notarization.

On Velsa, you will find suitable legal packages with reviewed contract templates and specialized legal experts to help you create the optimal legal structure for your startup.